CHAPTER 3: POLITICAL AND LEGAL ENVIRONMENT FACING INTERNATIONAL BUSINESS

3.1 The Political Environment

For a multinational enterprise to succeed in countries with different political and legal environments, it must
carefully analyze the fit between its corporate policies and the political and legal conditions of each particular
nation in which it operates.
3.2 The Political System
A political system is the complete set of institutions, political organizations, and interest groups, the
relationships among those institutions, and the political norms and rules that govern their activities. Thus, it
integrates the various parts of a society into a viable, functioning entity. It also influences the extent to which
government intervenes in business and the way in which business is conducted both domestically and
internationally. The ultimate test of any political system is its ability to hold a society together.
3.3 Individualism versus Collectivism
It is useful to profile the similarities and differences among political systems according to the general within a
society about the primacy of the rights and role of the individual versus that of the larger community. Under an
individualistic paradigm (e.g., the United States), political officials and agencies play a limited role in society.
The relationship between government and business tends to be adversarial; government may intervene in the
economy to deal with market defects, but generally it promotes marketplace competition. Under a collectivist
paradigm, the government defines economic needs and priorities, and it partners with business in major ways.
Government is highly connected to and interdependent with business; the relationship is cooperative.
3.4 Political Ideology
A political ideology is the body of goals, theories, and aims that constitute a sociopolitical program (e.g.,
liberalism or conservatism). Pluralism indicates the coexistence of a variety of ideologies within a particular
society. Although shared ideologies create bonds within and between countries, differing ideologies tend to
split societies apart. The two extremes on the political spectrum are democracy and totalitarianism.
3.5 Democracy
A democracy represents a political system in which citizens participate in the decision-making and governance
process, either directly or through elected representatives. Contemporary democracies share the following
characteristics: freedom of opinion, expression, press, religion, association and access to information; freedom
to organize; free elections; an independent and fair court system; a nonpolitical bureaucracy and defense
infrastructure; and citizen access to the decision-making process. In decentralized democracies, e.g., Canada
and the United States, companies may face different and sometimes even conflicting laws from one state or
province to another. The defining characteristic of democracy is freedom. Measures of political rights and
civil liberties have been developed to assess levels of freedom; a country may be rated as free, partly free, or
not free.
3.6 Totalitarianism
Totalitarianism represents a political system in which citizens seldom, if ever, participate in the decisionmaking and governance process; power is monopolized by a single agent and opposition is neither recognized
nor tolerated. In theocratic totalitarianism, religious leaders are also the political leaders. In secular
totalitarianism, the government maintains power through the authority of the state. Other variants of
totalitarianism include authoritarianism and fascism.
3.7 Trends in Political Systems
Several factors have powered the democratization of the world. First, many totalitarian regimes failed to
improve the economic lives of their citizens, who eventually challenged the right of the state to govern.

Second, vastly improved communications technology weakened the ability of regimes to control peoples
access to information. Third, many people who champion democracy truly believe that greater political
freedom leads to economic freedom and higher standards of living. Although the world is experiencing
general movements towards democracy and more open economies, this does not necessarily indicate an
increasing homogenization of political systems. Not all nations embrace the concept of "democracy" as
defined by Western standards. China and Russia are two examples of countries with different views of
democratic governance.
3.8 Political Risk.
Political risk is the possibility that political decisions, events, or conditions will affect a country's business
environment in ways that will cost investors some or all of the value of their investment or force them to
accept lower than projected rates of return. Leading sources of political risk are: expropriation or
nationalization, international war or civil strife, unilateral breach of contract, destructive government actions,
harmful actions against people, restrictions on the repatriation of profits, differing points of view, and
discriminatory taxation policies.
The following types of political risk range from the least to the most destructive.
1. Systemic Political Risk.
Systemic political risk creates risks that affect all firms because of a change in public policy. However,
such changes do not necessarily reduce potential profits.
2. Procedural Political Risk.
Procedural political risk reflects the costs of getting things done because of such problems as government
corruption, labor disputes, and/or a partisan judicial system.
3. Distributive Political Risk.
Distributive political risk reflects revisions in such items as tax codes, regulatory structure, and monetary
policy imposed by governments in order to capture greater benefits from the activities of foreign firms.
4. Catastrophic Political Risk.
Catastrophic political risk includes those random political developments that adversely affect the operations
of all firms in a country.
3.9 LEGAL ISSUES IN INTERNATIONAL BUSINESS
Two major areas of concern to international business concerning legal issues are operational concerns and
strategic matters.
3.9.1 Operational Concerns
Efforts to start a business, to enter and enforce contracts, to hire and fire employees, and to close a business are
all affected by national laws and regulations. While there appears to be an inverse relationship between a
countrys per capita income and its tendency to regulate business, the legal systems of the more highly
developed countries tend to regulate the major operational features of business activity more consistently than
do the less developed nations. Further, those countries that make it easy to start a business also tend to impose
fewer and simpler regulations to hire and fire workers and impose less regulation in their courts and
bankruptcy systems.
3.9.2 Strategic Concerns
Many legal issues affect the process of value creation. The following legal contingencies often shape an
international competitors strategic plans.

1. Product Safety and Liability. Often products must be customized in order to comply with local
standards, which may be higher than those found in a firms home market. While product liability laws
are very stringent in markets such as the United States, they are spotty, absent, and at times even
arbitrary in many less developed countries.
2. Marketplace Behavior. National laws determine permissible practices in pricing, distribution,
advertising, and the promotion of products, and they vary widely from one country to another.
3. Product Origin and Local Content. Local content is important to all nations, and most countries
push foreign firms to add value locally. In addition, product origin determines applicable fees and may
be subject to quantitative restrictions as well.
4. Legal Jurisdiction. Every country specifies which law should apply and where litigation should occur
when agents are involvedwhether they are legal residents of the same or different countries.
5. Arbitration. Most arbitration is governed by the New York Convention, a protocol specified in 1958
that allows parties to choose their own mediators and resolve disputes on neutral ground.